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When we were back in college, we were told that 5% unemployment was roughly the ideal rate for fully developed economy. (It was called the ‘non-accelerating inflation rate of unemployment,’ or rate of unemployment below which inflation would start rising. To our minds, it was something of a fudge term invented by mainstream economics to redefine full employment, but nevermind.) It so happens that before the crash of 2007-8, the United States was just below 5% unemployment. However, according to a post over at the Wall Street Journal’s Real Economics, if we set ourselves the low expectation-goal of returning to pre-crash unemployment, we would not reach that level until December 2024. That calculation is based on assuming that jobs and the labor force grow at the rate they have for the past six months. Those are, needless to say, dismal prospects.

Anemic job growth is bad news not just for the unemployed, but for the currently employed too. A large, and desperate, reserve army of labor weakens the bargaining power of existing workers, a point that another recent Real Economics post made clear. According to a survey of 600 employers, paid family leave is down from 33% in 2007 to 25% now: “Other casualties include assistance with adoption expenses, which tumbled to 8% from 20% in 2007; elder-care referral services, down to 9% from 22% in 2007; and mentoring programs, which fell to 17% from 26% in 2007.” The same goes for wages. In the US, families may be making more, but it is not because wages are higher, but because they are worker longer hours – “In 2009, for instance, the typical two-parent family worked 26 percent longer than the typical family in 1975.” This is a “jobless and wageless” recovery.

This news goes to the heart of a recent debate over the use of fiscal or monetary policy – ie jobs programs and payroll tax cuts or higher inflation targets. This debate began between Matthew Yglesias, who argued for higher inflation targets, and Corey Robin and Doug Henwood, who argued for jobs programs and against the effectiveness of monetary strategies. The debate soon ballooned outwards, getting picked up, at least thematically, by Paul Krugman and Brad Delong. Henwood’s ‘the limits of easy money‘ is the best (and seemingly final) summary and statement of the stakes of this debate, as is this post by Corey Robin (which also contains the links to the earlier posts, for those who want to follow all the ins and outs). There is an important point from this debate that bears directly on recent job market news regarding declining benefits and stagnant wages. One thing that both Henwood and Robin point out is that a jobs program isn’t just a good form of economic stimulus – especially when current monetary strategies haven’t done much – it is also a good way of increasing the economic power of those who don’t have much:

Henwood – “[a jobs program] would put a floor under employment, making workers more confident and less likely to do what the boss says, and less dependent on private employers for a paycheck. It would increase the power of labor relative to capital.”

Robin – “what a government jobs program would mean to us…greater chances of unionization; better options (often) for pay and benefits; greater options for exit from bad private-sector work and thus, in the long run, better options for voice and power at that work.”

A jobs program is no silver bullet, there are undoubtedly some downsides. But this point, especially in the current moment, is an important one to make. Different strategies for stimulating the economy are never just a matter of which technical fix is the most appropriate. They are also a matter of how power is distributed in the economy, and thus human freedom. There is often a tendency in public debates to argue over the ‘right’ answer, as if this can easily be determined independent of political questions about whose interests are served best, and how this shapes the lines of power in society. But, as we have tried to argue previously regarding financial regulation, expert knowledge and narrow policy concerns are not so easily extricated from questions of power and values. That is why unemployment is a problem for everyone, not just the unemployed – it’s not just a matter of people’s ability to survive, but to exercise power in and over their daily lives.

Of course, as we have stressed in previous posts, we can also see here some of the underlying political economy of certain economic proposals. Employers know quite well the dangers of a more assertive labor force. That is why a something like a jobs program would require more self-assertion amongst workers, and a greater willingness to make openly class based appeals by political leadership. Even more minimally, it would require political leaders to be more willing to accept and make explicit that, in choosing between forms of stimulus and budget deals, some interests have to be sacrificed to others, no matter which policies they end up choosing. In the conservative, tax-cutting and benefits-slashing climate of the debt-talks, honesty on these issues is in even shorter supply than jobs.

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In comments on a recent post on financialization, a number of criticisms were raised that are worth exploring further. Readers have reasonably objected that a graph showing increased financialization of the US economy demonstrated less than first appears. These objections break down into at least four claims:

1. Finance has been a part of modern economies for ages, and a major part at least since the late 19th century, what’s so different now?

2. To the degree there is something new, isn’t it a product of increasing complexity and thus a further refinement of the division of labor?

3. The financial class is really the only group that understands the ins and outs, and thus the stakes, in various regulatory and private decisions regarding this area of economic activity. There are experts, and only experts have the competence to make informed decisions. It’s either the experts or the Tea Party, you decide.

4. If there are other interests at stake, what exactly are those interests, and how are they articulated in the particular case of, say, financial regulations? All that has been said on this blog so far is some vaguely democratic stuff about general interests.

We agree that these are important issues, but cannot respond to all of these objections at once. Question 1 is for separate posts. Suffice to say we think something distinctive has happened since the 1970s in national and global finance (one thing being the more global character of finance). These trends are importantly different from, say, the period from 1870-1914 that gave rise to concepts like ‘finance capital’ and ‘monopoly capital.’

Questions 2 and 3 go together. It is misleading, in our mind, to view the current financial architecture as a kind of natural development of the division of labor and economic complexity. Current markets are the product of a host of conscious political decisions, especially regulatory and de-regulatory choices. One could choose any number of examples, but few recent ones include the Gramm-Leach Bliley Act (1999), which eroded the boundaries between investment banking, commercial banking, and insurance provision; and the 2004 SEC decision to raise debt-to-capital ratios. These decisions significantly altered the structure of financial markets, allowing for certain kinds of financial ‘innovation,’ which it must be said many people even in finance don’t seem to have understood. So the structure of financial (and all economic) markets is the product of the laws the institute them, and the incentives these create.

A further reason we have doubts about the expertise argument is that everything suggests that they have not been using this expert knowledge in the public interest, but rather to their private interest. As we have noted on this blog before, dramatic rises in incomes at the top over this period have gone hand-in-hand with stagnating real wages and rising consumer debt. It would seem one of the most significant elements of financialization has been its distributional implications, not the improved risk management or allocation of resources. Put another way, there is no reason after this crisis to particularly trust the experts!

Which brings us to our response to question 3: people might not understand everything, but they can understand enough. That is to say, not only is it misleading to view the growth of finance as a natural development of economic complexity (question 2), but it is also wrong simply to say these market are too complex for most people to understand (question 3). True, most people can’t be expected to know about or even understand the ins and outs of Tier 1 capital ratio requirements, or the kinds of collateral required for overnight repo agreements. But that does not mean a) they cannot be given better information, and get better educated than many are now (see, for instance, well-known misperceptions about inequality) and b) that they cannot know their own interests and c) that they cannot be organized on the basis of these interests to put pressure on their government to better serve them. Echoing one of the commentators on this blog, we would say the greater problem is not the people’s incompetence, but rather their relative apathy. The popular response to this crisis – Tea Party aside – has been decidedly tepid. But when representatives and regulators fear they will lose their jobs, or worse, they tend to do at least a better job of keeping the worst at bay. Or put another way, as plenty of post-crisis evidence has suggests, the problem was not the lack of knowledge amongst regulators, but a willingness to look. That is not a problem of incompetence v. expertise, but a political problem. One suspects they look harder when there is more popular pressure on the government. But now we are talking about things like social movements and popular protests, which are too quickly written off as the noise of incompetent mobs.

One final point. Question 4 was about what kinds of regulations and economic structures would be more in the public interest. Not just who are we talking about, but concretely what are their interests? If financialization has been generally bad, what is the proper response? That is a harder question, though it is easy enough to start by saying most people do not have an interest in more tax cuts for the wealthy and more spending cuts in social services. That, however, is only one part of the question and does not directly address how to respond to financialization itself. This is a question we do not ourselves have clear and complete answers to, but we are confident enough to say that we have no confidence in our existing rulers, or current experts, to solve those problems.

It is interesting to read its take on the crisis: Die Linke after all was founded at the time when the German government was pushing through its competitiveness drive. Building on the social fall-out from the SPD-Green coalition government’s Agenda 2010 policies (see earlier post), Die Linke has carved out for itself a steady 10% of electoral support. The pamphlet is therefore a good illustration of what those to the left of the SPD in Germany today have to say on the crisis.

The pamphlet is written in the form of a series of supposed fallacies concerning Greece and the debt crisis. It aims at puncturing the myths that have dominated German tabloid discussion of the issue in recent months. It is also aimed at challenging some of those myths peddled by Angela Merkel in her public statements. It challenges most of these myths convincingly. On the causes of the debt crisis, it notes how debt alone is not necessarily a problem. What matters is the interest paid on it. As markets begin to speculate on the likelihood of a Greek bankruptcy, its borrowing costs soar. We have seen this in the case of Greece and we are seeing today with Italy. The pamphlet also comments on the zero-sum nature of German growth within the Eurozone over the course of the 2000s, a point made on this blog. “The German success”, writes Stephan Kaufman, author of the pamphlet, “was… merely the inverse image of the failure in the Euro periphery, because Germany would not have gained surpluses if it had not been for the deficits in Greece, Spain and Portugal” (pp9-10). The pamphlet attacks some of the popular myths around work shy, holiday happy Greeks. In fact, the average working week for Greeks is longer than for Germans (44.3 hours in Greece; 41 hours in Germany – p5). Greeks retire on average a little later than Germans (at 61.9 years of age according to the OECD, cf. 61.8 years of age for Germans). The pamphlet also makes the good point that German loans to Greece are not paid for by the German taxpayer straight out of national income: they take the form of loans raised by the German governments in international markets, at a low rate of interest (p18). They are not ‘gifts’ or subsidies, they are investments which the German government calculates will earn them a healthy rate of return.

The pamphlet itself is limited by its own format as an attack on reigning myths. Identifying the fallacies is a starting point but the pamphlet says little about what it thinks should be done. On that point, it is laced with a curious Euro-chauvinism. It believes that any Greek default or write-down of its debt will do more harm than good as it might spread contagion and would lead to significant losses for European banks. The pamphlet cautions against contagion as it might spell the end of the Eurozone, “which is the backbone of the Germany economy” (p14). It goes on to argue in favour of the Euro on the grounds that it aspires to be “a world currency that can compete with the US Dollar” (p15).

Such arguments contain their own myths. The Euro is hardly the backbone of the German economy: Germany has used it to its advantage and has exploited the imbalances of the Eurozone. But its export-led boom does not depend on the Euro as such. It depends upon the containment of wage growth in Germany relative to its export markets. It seems perverse for the German left to defend the Eurozone in the interests of German labour when the Euro has been used as one the main justifications for the government’s growth model that excludes the possibility of wage rises for workers.

The pamphlet also fails to address one of the key problems: a lack of political leadership in Greece. One of the reasons why the crisis seems so intractable is that the Greek government cannot contemplate leaving the Eurozone. The ability to re-issue its currency, introduce capital controls and win the population to a long-term national project of economic renewal, is evidently beyond the Papandreou government. It sees no future outside of the endless negotiations in Brussels. Those out on the street in Athens, fed-up with the ongoing austerity measures, do not seem to believe in political solutions at all, preferring to dismiss both their own leaders and those of the EU and the IMF. The pamphlet itself fails to see this problem, reiterating instead the common view that the problem lies in the power of the markets. Yet the markets are divided: some argue for a Greek default and exit from the Eurozone; others suggest this would be the beginning of an unmitigated economic meltdown in Europe. Both can’t be right. The best option for Greece would be to default on its debts and leave the Eurozone. Yet few, if any, in Greece seem to believe in a re-issued Drachma. Until that changes, the impasse will continue.

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A friendly post by Corey Robin picks up on a discussion about what counts as financialization and what does it mean politically. Robin argues that a key feature of the “financialization of political discourse” is to assume that the financial industry is the natural constituency in a debate about financial regulation. As if everyone else didn’t have a stake in how financial markets are organized and regulated. This speaks to one of the more perplexing features of the post-crisis politics. Despite a great deal of resentment aimed at bankers, and despite their role in increasing rather than managing systemic risks, they have played one of the largest roles in shaping post-crisis oversight. It would seem that it takes more than a crisis to shake the tendency in the US to allow those who appear to be experts to rule their domain.

For those who think this debate is lacking in concreteness, it is worth recalling that financialization is about more than what happens at the level of discourse. Crunching a few numbers, we plotted data found over at the Bureau of Economic Analysis (hat-tip Doug Henwood) on value-added per sector from 1947 to 2010 in the United States. This is a graph vividly illustrating the financialization of the US economy (click on graph to enlarge)

While in 1947 manufacturing accounted for 25.6% of GDP and finance, insurance, real estate, rental, and leasing accounted for 10.5%, those quantities are now almost reversed. In 2010 manufacturing accounted for 11.7% of the value-added, while the above financial activities accounted for 21.1%. There is undoubtedly more to the story than one graph can tell. Value-added, for instance, may not be the best way of presenting changes by sector. But the lines still tell a story, and that is of a social choice to make financial activity dramatically more important – and manufacturing less important – as a part of our economy.

Of course, the above figures alone don’t tell us about the desirability of the choice. But its stated benefits – more efficient allocation of resources, better management of risk, superior management of the economy – have not stacked up. There are wider questions to which we shall have to return – how financialization was linked to the stagnation of living standards for the working class but rising wealth for the upper class, how it was linked to industrialization and thus improvement of living standards in China, and the concrete relationship between financial and industrial sectors. For now it is clear that financialization is not just about allowing a new group of ‘experts’ a share in ruling, but about dramatically restructuring the economy itself. That is a choice that might need some rethinking.

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The claim that the European Central Bank was independent of any political interference was always a little difficult to substantiate. Membership of its governing committee was rigidly tied to nationality even though members were expected to vote in the general European interest. Recently, French President Nicolas Sarkozy insisted that Italy retire one of its members in order to avoid there being two Italians – and no Frenchmen – within the upper echelons of the ECB. Neutral indeed. Nevertheless, the ECB’s creation was perhaps the best expression of the belief that short-termist and self-serving politicians need to keep their hands out of the monetarist policy pot. In the monetary policy jargon, this is all about ensuring that central banks can issue ‘credible commitments’ to the markets. So when they say they are going to be tough on inflation, everyone believes them.

Recent events have suggested that the ECB’s independence is being steadily mined by the ongoing Eurozone crisis. One reason is because of the faultlines exposed by the crisis, with the ECB being firmly located on one side of the growing gulf between creditor and debtor interests across Europe. The ECB, and particularly its out-going director, Jean-Claude Trichet, has consistently argued against anything that might look like default on the part of those countries signed up to an EU bail-out package. In so doing, the ECB has put itself forward as the leading defender of the private creditor interest in Europe. Neutral indeed. Most recently, the ECB declared its intention to raise Eurozone-wide interest rates 0.25%, from 1.25% to 1.5%. This is in order to quell inflation, the result of food and energy price-hikes, which some think will provoke higher wage claims in the Eurozone’s bigger economies. The response from Ireland, Greece and Portugal was immediate: does the ECB not realize that in raising rates it is making it even more difficult for these countries to repay their loans?

The second reason is more subtle but also more important. Whilst being officially a non-political body authorized to deal exclusively with Eurozone monetary policy, the ECB has been getting steadily more involved in fiscal policy, notably in providing cash-stricken Eurozone members with much needed liquidity. The ECB, like any central bank directed by political concerns, has been acting as lender of the last resort. It has for some time been keeping the Greek banking system afloat. To date, the ECB has provided about 100bn Euros in loans to Greek banks, in exchange for Greek government bonds classified as junk by the markets.

The official reason why Trichet declares himself so fervently against any default by Greece is that it will create “contagion” in the markets: if Greece defaults, will private investors not believe that Portugual and Ireland will also do the same? But there is another reason why a Greek default would be a problem for the ECB. It would force it explicitly out of its independence shell and into the terrain of political choice. With Greece in default, the ECB could abandon the country’s banking system by ending its loans. Or it could make its role in fiscal policy explicit, providing finance to governments shut out of international markets. This is a choice both Trichet and national governments would rather avoid as it would force them to reveal their cards about whether they support closer political union within the Eurozone. Whilst central bank heads and member states may disagree on this point, they all seem to agree that they’d rather not be forced to have a public debate about it. A Greek default would make that debate increasingly difficult to avoid.

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Ezra Klein has a great post showing that Obama’s first proposed budget is more conservative – when measured in the ratio of spending cuts to tax raises – than any of the deals under Clinton, Bush I or Reagan. Klein’s post includes the following, vivid graphic:

Klein thinks that the Democrats, should something like this deal go through, “were suckers for offering it.” A thought reinforced by Nate Silver’s recent post showing that as Republicans have become increasingly intransigent they have alienated yet more moderate voters. The irrationality seems difficult to apprehend – why are Democrats offering such a rotten budget deal, and being so politically wimpy?

This is, in fact, a regular complaint about the Democrats (and growing louder, see here and here). It is a complaint that stems from an assumption familiar to anyone acquainted with contemporary political science, or with what appears to be plain old common sense: congressmen will do whatever will maximize their chances of re-election. If they are rational in that way, it would seem this deal is irrational because it violates what the polls recommend. Of course, one might say that it isn’t always clear, especially in an off year, what will maximize electoral chances. There are no doubt many clever ways of saving the basic model of electoral politics – that it is the power of the ballot, and more or less only that power, that sways politicians.

But there is another possible explanation – that the ballot is not so powerful, or at least not the sole power, at play in the actions of representatives and political leaders. To be clear, we don’t mean here that there are other kinds of social power that might influence voters – like media monopolies skewing voter perceptions, or well-funded political action committees buying advertisements to sway voters.

The point is about influences on representatives themselves. There are, after all, battles that individual representatives, even parties, are sometimes willing to take a stand on, even if it might threaten electoral chances. There are, moreover, long periods between elections during which groups can exercise influence, of subtle and not-so-subtle varieties, over the thinking of politicians and those counselors around them. Parties also have commitments to certain core constituencies, fidelity to whom might override short-term electoral fortunes – itself a perfectly rational strategy since the ultimate aim of power is to do something concrete with it, not just keep it. As Corey Robin notes in a great post on the question of the Democrats’ ‘constituency,’ the problem for the Democrats may not be a failure to test the electoral winds properly, but a more fundamental problem with the Party’s conception of its core – as opposed to peripheral – constituents. Or, put another way, it may just expose the truth of the party – that it has no core, it is a catch-all party that drifts in, rather than attempts to exercise mastery over, its political environment.

Whatever the reason, it might be worth seeing the oddity of the Democrats’ behavior not as a failure to act rationally given the potential electoral support for a less conservative budget, but as something else. It might be evidence that our conventional view of democracy, and democratic power, is to say the least simplistic. Each person has only one vote, but the vote is only one form of power exercised in this process, and it may not even be the most important one.

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There are many aspects to the financialization of the economy over the past forty years or so, and it seems that nobody has put together all the pieces. A recent paper by two economists and a Treasury official (hat-tip Doug Henwood) on changes in income growth of top earners shows some striking results. The authors begin with a more or less well-known statistic – the top 0.1% are getting an increasing share of national wealth. By their calculations, the top 0.1% took home around 2% of national income in 1981, but by 2005 took home 8%. What’s new in the paper is identifying who, exactly, these super-wealthy are. According to the paper “the data demonstrate that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years” (the period 1979-2005). Moreover, this group accounts for “70 percent of the increase in the share of national income going to the top 0.1 percent.”

What does any of this have to do with finance? After all, that group includes more than just financial professionals. So the fast rise at the top isn’t just amongst hedge fund managers. Well, as the paper discovers, the reason lies in changes in executive compensation, ie the stock market. Even if you weren’t directly in finance, increasing compensation in stock options and the like meant that top “executives, managers and supervisors” started taking home much more income than they used to. Indirectly, then, financialization (of pay) contributes to redistribution of wealth upwards.

This is politically interesting for a number of reasons. First, as the authors show, the rapid rise at the top does not have nearly as much to do with tax cuts as one might think. In a nifty chart at the end of the paper, the authors show that the top marginal tax rates in Japan declined more or less at the same rate, and to the same level, as in the US:

However, Japan has seen nothing like the increase at the top. Indeed, the US (and English speaking countries) is somewhat unique in this trend. Another nifty chart from the paper:

This suggests marginal tax rates don’t have such a dramatic effect on distribution at the top as one might think. The authors further suggest that, since it was illegal in Japan until 1997 to compensate executives with stock options, and remains a less common practice, it is the practices of executive compensation that explain the difference. Thus the current debate in the US over taxes is extremely important (the paper also has an important discussion of why Laffer curve arguments against higher taxes on the wealthy are not well supported), but it is a small part of the overall determinants of social stratification.

Second, and following from that, these results are further evidence for the thesis we have been advancing about how regulation entails a class restructuring, not just correction of the market. Regulations, including indirect financial regulations like limiting executive compensation in stock options so that incentives are turned towards long run economic health of the company rather than short-run stock price changes, will affect not just those directly in the financial industries but those whose economic fates are directly tied to its fate.

Third, the paper bears implications for the wider political economy of the last thirty-forty years. Two arguments made in defense of a well-developed financial industry are that a) financial instruments allow business persons to hedge risk and b) they make certain kinds of production possible by concentrating capital (lots of little deposits in a bank) and making it available for loan to enterprises that otherwise couldn’t get off the ground (banks making business loans). These are sensible arguments in theory, but the actual practice seems largely to have been otherwise. Financial markets have been a hugely effective tool – far more effective than changes in marginal taxes – at redistributing wealth and income upwards. Even as many people at the lower and middle lost pensions, not to mention houses and other sources of wealth and income, and experienced stagnating wages, incomes at the top rose dramatically. Those seem to have been the most significant results of the past decades. There are no doubt many Luddite criticisms of finance, but there are many ideological defenses of it too.